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How 1Q18 Treated Microsoft’s Margins

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Nov. 20 2020, Updated 3:51 p.m. ET

Segment-wise contribution to revenue and margins

So far in this series, we’ve discussed Microsoft’s (MSFT) segment-wise performance, Whereas its Productivity and Business Processes and Intelligent Cloud segments reported growth, its MPC (More Personal Computing) segment did not.

Productivity and Business Processes, Intelligent Cloud, and MPC contributed 24%, ~28%, and 38%, respectively, of the company’s total revenue in fiscal 1Q18. The segments’ operating margins were ~39%, ~28%, and 33%, respectively.

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The cloud’s growth and contribution to margins

Microsoft’s commercial cloud rose 56% to contribute $5 billion to the company’s fiscal 1Q18 revenue. Its annualized revenue run rate hit $20.4 billion in fiscal 1Q18. The commercial cloud’s gross margin improved by eight percentage points and stood at 57% “with improvement in each cloud service, most notably in Azure,” according to Microsoft chief financial officer Amy E. Hood.

Currently, Microsoft is competing with peers Amazon (AMZN), IBM (IBM), Alphabet (GOOG), and Oracle (ORCL) to add new cloud data centers. By 2020, 92% of overall workloads are expected to be processed in cloud data centers, which explains these players’ billion-dollar investments in the cloud space. As Microsoft’s capex reduces with time, it is likely to gain earnings leverage.

Fiscal 2Q18 expectations

In fiscal 2Q18, Microsoft expects revenue of ~$11.7 billion–$12.1 billion.

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